3.7 Analysing the strategic position of a business Flashcards
What are the influences on the mission of a business?
Influenced by what owners want the business to achieve, their personal values and beliefs and what market opportunities there are.
Internal and External influences on corporate objectives and decisions?
Ownership, form of business whether it’s for profit or non-profit will have big effect on objectives, limited companies also have to answer to directors and shareholders.
Short- termism, shareholders demand quick return on their investment leads to short term objectives to increase profit doesn’t necessarily benefit it long term.
Internal environment, size, culture, resources of the business will affect its objectives.
External environment, political, legal, environmental, economic, social and technological factors aswell as competition will influence.
What is a strategy?
A medium to long term plan of action developed to achieve business’s objectives (based on corporate objectives) thus can only be put in place when aims and objectives have been outlined (eg what they wish to achieve).
What is a tactic?
Are short term plans for implementing strategies, so more focused on day to day activities.
What is the impact of strategic decision making on functional decision making?
Functional decisions are decisions made in individual departments, department managers make decisions in order to implement the overall strategy (so thus are based on strategic decisions of business), FDM tends to be more short term and lower risk than strategic decisions.
What is the SWOT?
A four factor model that details the strengths, weaknesses, opportunities and threats facing a business - helps managers to make strategic decisions.
The strengths and weaknesses are internal factors that business can influence whereas opportunities and threats are beyond control (external) of business so bus has to understand them in order to act appropriately such as political/legal/economic/social/tech factors.
Since SWOT analysis identifies these factors there’s overlap with functional objectives.
What is the value of SWOT?
-Very useful tool in developing strategy as it considers individual circumstances and is done in factual and objective way.
- In planning strategy, managers will focus on opportunities that build bus strength, converting weaknesses into strengths and on managing threats.
- One advantage of SOW is can easily be redone to take into account changing conditions, thus allowing bus to adapt its strategy using new SWOT.
- It also lets business know where it has competitive advantage over rivals, so bus can change strategy to focus on these elements.
How does a balance sheets and income statements allow business to assess financial performance?
Balance sheets: snapshots of firms finances in fixed point of time (short term financial status of how much the bus is worth), they show value of all businesses assets and all its liabilities. Whilst also showing value of capital (money invested into bus) and the source of that capital (loans, retained profit, etc). Net assets and TQ should always be the same.
Income statements: shows how much money has been coming into the company (revenue) and how has been going out (expenses), these can be used to assess financial performance if there is a sudden change in profits etc.
!! Helpful definitions of terms in a balance sheet !!
Assets: (machinery, stock) provide financial benefit to bus, given monetary value.
Non-current assets: assets business likely to keep for more than a year (property, land,production equipment) these loose value over time (depreciation).
Current assets: assets that business likely to exchange for cash within accounting year before next BS is made (receivables, inventories).
Current liabilities: debts that are needed to paid off within a year (overdrafts, payables and dividends).
Non-current liabilities: debts business will pay off over several years (loans, mortgages).
Working capital: amount of cash bus has available for day to day debts (current assets - current liabilities).
What is a liquidity ratio? Example?
Liquidity of an asset is how easily it can be turned into cash to purchase things, can be improved by decreasing stock, speeding up collection of receivables or slowing down payments to creditors.
Liquidity ratio shows you how solvent business is (how able it is to pay debts).
Current ratio= current assets/current liabilities
Answer written in the form _:1, if below 1.5 suggests liquidity problem
What’s a profitability ratio? Example?
Profitability ratio shows profit margin.
Return on capital employed (%)= operating profit/total equity + non-current liabilities x100)
ROCE tells you how much money is made by business compared to how much money has been put into business, higher ROCE the better can be improved by paying off debt to reduce non-current liabilities or making business more efficient to increase operating profit.
What is efficiency ratios? Examples?
Efficiency ratios show managers and shareholders how well the business is using its resources. They should know how efficiently the business uses its assets, how well managers control stock, creditors and debtors.
Inventory turnover= cost of sales/cost of average stock held, how many times during the year the business sold all its stock. Can be improved by increasing sales or holding less stock.
Payables= payables/cost of sales x 365, number of days the firm takes to pay for goods it buys on credit from suppliers.
Receivables days= receivables/sales revenue x 365, number of days business has to wait to be paid for goods it supplies on credit. RD should be low because helps with cashflow and working capital.
What is a gearing ratio? Rewards and risks of being highly geared?
Gearing ratio shows potential investors where business’ finances come from, what proportion comes from non-current liabilities (long term debt) rather than share capital or reserves (equity).
Gearing= non-current liabilities/total equity + non-current liabilities (capital employed) x100, gearing above 50% shows more the half of bus finance comes from long term debt eg highly geared, low gearing below 25% because less then quarter of finance reliant on long term debt.
Rewards of high gearing
-funding for expansion
-attractive growth phase
-less risky when interest rates low
Risks of high gearing
-may not be able to afford repayments
-risks when interest rates high
Value and Limitations of financial ratios?
Values
- good way at looking at business’ performance over period of time
- can use ratios to help managers with decision making
- use ratios to attract potential investors to help them decide if they want to invest in business
- useful to compare ratios with other business (meaningful comparison)
Limitations
- don’t take into account non numerical factors don’t provide absolute means of assessing companies financial health
- internal strengths don’t appear in fig (quality of staff)
- external factors don’t appear (economic or market environment)
- future changes can’t be predicted in figs so won’t appear in ratios (tech advances and change in interest rates)
-only inform past and present, bus currently growing will have poor ratios but doesn’t mean not worth investing in.
How is comparing data with other business beneficial?
- allows to compare performance so they can see what they need to improve
- comparisons put businesses data in context (low sales growth but competitor has low sales growth aswell)
- benchmarking (applying other bus strengths to use in your own bus)
What are other types of data to assess a businesses strengths and weaknesses?
Data is collected by each department
- Marketing (market share, market growth, sales growth and portfolio analysis (life cycle, how many products they have)).
- HR (labour productivity/turnover, employee costs as percentage of turnover, labour costs per unit, methods of motivation and training)
- Operations (capacity utilisation, unit costs FC VC, condition of machinery and process of operations).
What is the importance of core competences?
Are the capabilities of a business that are unique to them and give it competing advantage over rivals (capabilities rivals do not have) e.g specialist staff training or innovative production process.
CC are important as they are fundamental to success as they allow bus to compete in diff areas, hard for competitors to copy (makes bus more competitive), CC should also benefit consumer so they will choose that bus over others.
Business should be able to change CC to meet changing demands of its market, bus focus on CC when developing strategy.
Why should business assess short term and long term performance?
Data can be helpful to show trends in performance, business needs to take into account whether trends are permanent or temporary trends/changes when developing strategies, can also forecast future trends by extrapolating the data.
What is Elkington’s Triple Bottom Line Model?
Model used to judge overall performance, spilts performance into three overlapping areas (people, profit, planet), performance of these areas reported and assessed back to stakeholders (known as triple bottom line reporting). The idea is that businesses are responsible to all their stakeholders and to the planet, bus can only be sustainable if it balances financial performance with its impact on people and the planet.
Model is good way of assessing overall performance as its takes into account other business objectives instead of just increasing profit.
What is the importance of having different measures of assessing business performance?
Having different measures can guide managers strategic planning and monitor strategy’s effectiveness, by assessing three diff areas bus can consider its actions in each area and alter behaviour or culture.
What is Elkington’s Triple Bottom Line?
Model used to judge overall performance, splitting business performance into three overlapping areas (people, profit and planet), takes into account the business might have other objectives rather than profit.
Performance in each of these areas is assessed and reported back to stakeholder (triple bottom line reporting). The idea is businesses are responsible to all their stakeholders, and to the planet. A business only be sustainable if it balances financial performance with its impact on people and the planet.
How does legal environment affect competition?
In UK, competition act 1998 sets out laws on competition and what constitutes unfair bus practices. CMA’s job to prevent companies breaking competition laws, EU competition law regulates competition across the EU. Companies breaking these laws can be given big fines or even be criminally prosecuted. Bus needs to understand these so they don’t break them and watch for competitors breaking them
Laws include:
- firms cant conspire fix prices (agree to keep price of product above specific amount)
-bus cant conspire with competitors to limit production so that higher prices can be charged due to shortage.
-bus cant divide up the market to avoid having to compete (one agrees to sell in EU where one sells in Asia).
How does legal environment affect environmental legislation?
Industries which release waste into water or land are regulated by Environmental Agency, bus need to ensure their production processes don’t cause unnecessary pollution or risk heavy finds.
Some laws include:
-WEE (in both UK & EU), forces bus to increase recycling of waste electrical and electronic equipment.
-Landfill tax 1996, introduced to reduce amount of waste being dumped into landfill sites.
-Climate change act, requires large companies (most PLCS) to report greenhouse gas emissions in annual reports, released publicly so will influence to reduce them.
Businesses must factor cost of complying with these laws in decisions made, decisions about materials and processes may be influenced by environmental laws. Some bus may turn these restrictions to USP.
How does legal environment affect the labour market?
